Exclusive – Klaus Shäfer, CEO Uniper: “Security of supply is too important to leave to the market”

The market on its own cannot be relied upon to deliver secure electricity and gas supplies, says Klaus Schäfer, CEO of Eon-spin-off Uniper, in an exclusive interview with Energy Post. According to Schäfer, it will become “dramatically more difficult” to balance the power market as the share of renewables increases. He also sees the gas market becoming “more and more complex” and argues policymakers should establish minimum requirements for gas storage. Schäfer believes Uniper’s Datteln coal plant, currently under construction, is the last coal plant that will ever be built in Germany. He says gas has the future and Uniper is working on some way to get involved again in Gazprom’s Nord Stream 2 pipeline after having had to withdraw as prospective shareholder last year.

Uniper completed its separation from parent company E.ON on 12 September last year. Since then, CEO Klaus Schäfer, whom we interviewed in the run-up to his current role in November 2015, has been busy getting the books in order and developing a vision for the future. Uniper’s focus is upstream, meaning conventional power generation (including hydro) and global commodities trading (including the up- and mid-stream gas business).

In this interview with Energy Post, Schäfer sets outs the new company’s priorities, his views on the Energy Union (mixed) and prospects for an energy-only market (poor) and why, in his opinion, security of supply for both gas and power is increasingly at risk. At the official opening of its Brussels offices on 31 January, Uniper showcased the slogan “Energy has a new name”: to some, Uniper’s core businesses may be old hat; to Schäfer, they hold the promise of a bright future.

Where do you see the biggest opportunities for Uniper going forward?

There are three big topics we’re pursuing. First, security of supply products in Europe including storage and flexible plants, albeit remunerated differently to today. Second, Linking markets – because of the size of our gas business and its flexibility, we think that if the global LNG market develops further – we’ve barely seen the first deliveries from the US – Europe will be the market that provides flexibility on a global scale and we’re in a strong position to benefit from that. Third, conventional energy – this is still an important product in many, many markets and while we would not necessarily invest there in terms of capacity, we are deploying our intellectual capabilities and people to contribute to that growth.

How optimistic are you about the European market and more specifically, the EU’s plans for an Energy Union?

I would judge it differently between gas and power. On gas, I believe that the Energy Union is a real success. If you go back 15 years in the European gas market and compare it to today, there has been a dramatic change. It’s not that long ago that every cubic metre of gas had a ‘passport’ or label attached to it, that said it could only go to one particular destination, Italy for example, and nowhere else. The gas market today is a good example of what Europe can achieve.

On power, I think we were on the right track but national interests have intervened. In my view, we’re a bit on the back foot there now. We’re losing some of the original ideas of the Energy Union, for example, with proposals for renewables and energy efficiency targets for 2030, rather than leaving decarbonisation to a European-wide carbon market. If everyone goes back to national targets then what’s the benefit of a European market? [Editor’s note: member states are expected to propose national contributions to the renewables and energy efficiency targets.]

What do you see as the next big energy challenges for Europe?

First, market design. Because in a market where renewables have a higher and higher share of the energy mix, the energy-only market by definition trends towards [prices of] zero so there is no attraction for energy investments. Renewables need a special instrument, or even better a market model, to support them and so does any other form of capacity, including storage, in the market.

Second, coal generation. What will happen to that across Europe? There are discussions about this not just in Germany but in France, the UK and the Netherlands.

And third, storage. This is a topic we happily tend to ignore. We assume it will be there. But the question is: what can be done through storage on the electrical side? What can be done on the chemical side? By that I mean power-to-gas, power-to-hydrogen and also normal gas storage. In the current market I do not see any push to invest in new gas storage or even to necessarily maintain existing levels.

Do you believe Europe needs to invest more in its gas infrastructure?

In most countries, simply because of past investments, you probably see the correct level of infrastructure. But you also need to make sure it’s used. For that, we depend on the market. Our security of supply in a strong winter in March depends on what the price expectation was on a traded market nine months before for that winter. Hopefully that was right. But what if it wasn’t? What do we do then? Markets tend to result in better predictions than other systems, but they can get it wrong. I think security of supply in terms of heating our homes is too important to leave to a pure market assessment.

“During the cold spell this January, we had some supply shortages in LNG. It was just not coming in the amounts that were predicted because prices in Asia were significantly higher than assumed”

We tend to discuss security of supply of gas in terms of LNG and diversification, but I think there should [also] be a certain minimum amount of gas that has to be in storage. Ten to fifteen years ago you had strong integrated players that took responsibility for security of supply. The energy market liberalisation packages have dismantled that value chain – for good reasons – but without resolving who is now responsible for security of gas. On the power side, it’s clearly the TSO [transmission system operator] but on the gas side, it’s not clear.

The EU is close to finalising a review of its gas security of supply regulation, but a minimum gas storage requirement is not part of that. Why not?

Because people don’t really focus on resolving a topic they don’t like. They say there was no need for it in the past, so there is no need for it in the future. I’m saying the whole gas market is getting more and more complex and it’s a bit too easy to leave it to that.

I love the concept of saying that LNG in itself provides security of supply. To attract LNG you need higher prices. In a shortage you will have that, but the extra gas will only arrive if the price signal you’re setting in Europe is higher than in Japan, for example. During the cold spell this January, we had some supply shortages in LNG. It was just not coming in the amounts that were predicted because prices in Asia were significantly higher than assumed. And we need to consider a certain time lag as re-routing ships will not work from one day to another. It can take up to several weeks.

Are you worried about security of supply for electricity in Germany, your home market, because of a larger and larger share of variable renewables?

Right now because of past investments, Germany still has a lot of capacity supporting the market, although it is not being adequately compensated. Secondly, you have the neighbouring countries. As long as there is enough support also from the neighbours, it will work.

I do see the risks increasing. The balancing of a market that has more and more renewables gets more and more challenging. We have 35% renewables in Germany on average right now of which maybe [just] 10% is steady renewables (hydro and biomass). When you double that volatile element of the market it doesn’t get twice as difficult to manage the system, it’s exponential, it’s dramatically more difficult.

What opportunities do you see for the energy-only market?

The current German government is focusing on the ‘energy market 2.0’, meaning price signals [for investment] would have to come from the market. But I do not see those price signals. We have in place a variety of support mechanisms for reserve power plants and redispatch mechanisms which dampen any price signals. If you want new capacity or if you want to extend the life of existing capacity, I think you need separate mechanisms to do that. It won’t be the energy-only market. The UK, France, Italy and Sweden have all seen that and acted on it. I believe that over time also other countries will follow suit.

So you believe that Germany needs a capacity market?

We need a market design that adequately remunerates generators to the extent that they benefit the market. We have a variety of overlapping instruments for that in Germany, but what is lacking is a real market design that is seamless and that works.

Germany has a grid reserve, a capacity reserve, a new-build reserve and a “lignite reserve” – they all follow different economic logics. Sometimes they interact, sometimes not. I would love to see a capacity market. I think that would be the appropriate mechanism if Germany feels either that capacity needs to be maintained or new capacity built.

How do you see the role of gas in the power mix?

I think that over time the share of coal will go down and gas will take its rightful position in the energy mix. From an environmental and flexibility point of view, gas is the far better complement to renewables. But for that to happen, you either need a higher clean spark spread or some other form of compensation for gas plants. Gas would also benefit from a higher carbon price.

What do you think of the European Commission’s proposal in its Clean Energy Package for a 550gCO2/kWh emission performance standard to be applied to capacity markets?

We clearly welcome the fact that the Commission has recognised that capacity markets – where they are needed – are an acceptable form of compensating capacity in the market. This is a first for the Commission.

“I love it that people think it necessary to discuss the coal exit. I don’t see the need to discuss it because it’s a reality”

I think a CO2 target for new-build capacity to benefit from capacity payments is absolutely right. [But] if you look at the role of a capacity market in providing security of supply, you want to make sure that the least expensive existing capacity is maintained in the system. Normally these plants run with very low load factors. I cannot see why an emissions target is a determining element in whether a certain plant serves the stability of the energy system.

You would certainly exclude coal plants completely. [And yet] there are coal plants where you would want to at least assess whether they are important for the system going forward. We have a very important coal plant close to Frankfurt – the Staudinger plant – which is considered system critical, for example.

When do you think coal plants in Germany will have to close?

I love it that people think it necessary to discuss the coal exit. I don’t see the need to discuss it because it’s a reality. I think that our coal plant that will go online in 2018 – the Datteln plant – will be the last coal plant commissioned in Germany. In the next years you will see coal plants leaving the market for technical and commercial reasons. The share of coal capacity will continuously decline.

The only question is: do you want to change that glide path? What needs to be discussed is what’s needed from a political and system point of view and do you incentivise that? I would welcome an honest discussion about that.

Ever changing regulatory action instead of making use of the existing and agreed framework is not what we need. Give carbon a price that matters and you won’t need a rag rug of additional and in most cases national re-regulations.

What kind of innovations is Uniper working on?

Storage clearly offers some of the most exciting opportunities. We’re working on all types, from batteries to heat and chemical storage. In my view today power-to-gas is the only system that really offers seasonal storage of power. However, we will need to see at what prices all this will fly.

“We source more than 20 billion cubic metres of Russian gas that need to be delivered to Uniper’s mainly German customers”

Another topic that could change the market completely is carbon capture and use (CCU). I think we need to refocus on what is a good use of CO2. If we were to resolve that, then current technologies would look radically different from how they’re judged today.

And finally, what kind of involvement do you now envisage in Nord Stream 2?

I have always said that I believe this project is strategically relevant for Europe. It is strategically important for us too. We source more than 20 billion cubic metres of Russian gas that need to be delivered to Uniper’s mainly German customers. A direct, strong link to a Russían gas source helps to fuel the vast European gas grid system and provides security to pass on gas also to other EU-Member States.

Obviously after the issues we had in the summer in Poland [Uniper and other European companies withdrew as shareholders from Nord Stream 2 under pressure from the Polish competition authorities, editor], what holds true today is what we said then: we will evaluate other means of supporting the project. The fact that we haven’t announced anything [yet] just means that we’re probably still working on it.